It’s often said that the hardest part about taking out a small business loan is the wealth of decisions you have to make before filing an application. Chief among these decisions is whether or not taking out a small business loan at this specific time is undeniably a good idea. There’s so many factors to consider. But while every business has its own circumstances, answering just a few general questions will tell you if your business’s needs warrant additional funding and if you are prepared to pay it back.
Any reputable business lender will suggest that all potential applicants begin their journey with this first question: Why do you believe you need a small business loan?
Another way to phrase the question above is, “Is your intended purpose for a small business loan justifiable?” You must ascertain that the expense(s) or investment you want to finance is truly important and that a small business loan is the most sensible way to finance it.
Here are some popular uses for small business loans:
- Increasing staff
- Purchasing equipment
- Adding property/Expanding your physical space
- Ordering bulk inventory
- Covering operational expenses during a temporary slow period/elongated business cycle
- Taking on a large project requiring many/expensive resources
- Paying off other outstanding debts
- Developing a new product/service
- Launching an expansive marketing campaign
If you are looking to use a small business loan for another purpose, contact a reliable business lender who can tell you if that purpose is justifiable.
The two main advantages of a small business loan are as follows: One, you gain the ability to act now, as opposed to waiting until you have earned the money yourself. Two, you gain a sum of money you would likely not be able to earn with your current means.
So, when you ask yourself if a small business loan is the most sensible way to finance your expense(s) or investment, what you are really asking is if you need to act now and if you should be able to come up with this amount of money on your own.
Here are the most popular business funding programs:
- Standard Business Term Loan: You receive a set amount upfront that is then paid back (with fees) over a set period of time. Fixed payments are made each month.
- SBA Loan: Same structure as a term loan. The only differences are the requirements and terms, which will be explained later on.
- Business Line of Credit: You are given a revolving credit limit that you can borrow from at any time. Payments are only made when you borrow.
- Merchant Cash Advance (Credit Card Factoring): You receive a lump sum that is paid back via a fixed percentage of daily debit and credit card sales.
- Invoice/Accounts Receivable Factoring: The business lender purchases your outstanding invoice/receivable for a discount price and pays you right away.
- Equipment Financing: Like a traditional business loan, you receive financing to pay for a particular piece of equipment, then fixed payments are made each month.
- Revenue Based Business Loan (Business Cash Advance): Similar to a MCA but your payments are deducted via a fixed percentage of your entire monthly revenue.
Here are the most popular business lenders along with the products they offer and the time it usually takes to receive funding (Average Funding Time/AFT):
- Commercial Bank: Term Loan ($10,000 to $5M), SBA Loan ($5,000 to $10M), Business Line Of Credit ($5,000 to $100,000) AFT (48 hours to 90 days).
- Credit Union: Term Loan (Up to $250,000) Business Line Of Credit (Up to $15,000) AFT (Up to 90 days).
- Peer to Peer Lender: Technically, peer-to-peer lenders like Funding Circle, Lending Club, and Street Shares aren’t business lenders themselves. The money doesn’t come directly come from them. Instead, they act as a middleman between the borrower and individual investor or an institutional investor, like a hedge fund or investment bank. Between these three options, you can get a Term Loan ($2,000 to $500,000), Business Line of Credit ($5,000 to $150,000), and Invoice/Accounts Receivable Factoring (90% of invoice), all of which will reach your bank account in anywhere from 1-14 days.
- Online Lenders: The most widely-praised online business lenders include Kabbage, OnDeck, Currency Capital, and BlueVine. Between these four options, you can get a Term Loan ($5,000 to $2M), Business Line of Credit ($2,000 to $250,000), and Invoice/Accounts Receivable Factoring (Up to $250,000), all of which carry an AFT of 24-48 hours.
- United Capital Source: Term Loan ($10k to $5m), SBA Loan ($50k to $10m), Business Line Of Credit ($1k to $250k), Merchant Cash Advance ($7,500 to $1m), Invoice/Accounts Receivable Factoring ($10k to $10m), Equipment Financing($10k to $5m), Revenue Based Business Loan ($10k to $5m), AFT (24-48 hours).
Here are the requirements for the programs offered by the five business lenders above:
- Commercial Bank: Credit score must be above 700. Business must at least six months old, but preferably over two years old. Annual business revenues of at least $100,000. Several banks offer unsecured business term loans and business lines of credit, meaning you do not need collateral. But in order to qualify, you must fulfill the other requirements with flying colors. What makes all bank loans so much harder to qualify for (compared to other options) is the near-universal requirement of significant working capital. Banks favor applicants who have enough money to finance their desired investment on their own, a.k.a applicants who don’t really “need” a loan. If you don’t think you can satisfy this requirement, you may still be able to get approved by providing collateral. Equipment, inventory, accounts receivable, or even all the business’ assets can be required for collateral.
- Credit Union: In order to borrow from a credit union, you must live, work, worship, or attend school in a specified area, or be a member of a group such as a school, labor union, or homeowners’ association. There are, however, numerous credit unions that anyone can join, usually by making a donation to a certain charity or joining an organization that is affiliated with the credit union. As for general requirements, they aren’t much different than those of a traditional bank, though many do not require collateral. Applicants for small to mid-sized loans may also be able to fall slightly short on some requirements, mainly because credit unions are non-profit.
- Peer to Peer Lender: At least one year in business, minimum personal credit score of 600, and annual revenue of at least $50,000. Other requirements, like personal guarantees and recent bankruptcies, are based on which lender you choose.
- Online Lenders: At least six months in business, 585+ credit score and $75,000+ in annual revenue for a Term Loan. For a business line of credit, a minimum credit score is not required but you must be in business for at least a year and earn at least $50,000 in annual revenue. Invoice/Accounts Receivable Factoring requires a credit score of 530+, at least 3 months in business, and $100,000+ in annual revenue.
- United Capital Source: At least six months in business and $100,000 in annual revenue. Borrowers with low credit scores (around 500) can be approved for short term business loans, merchant cash advances, business lines of credit, accounts receivable factoring, and revenue based business loans. UCS’s SBA “Marketplace” Loan is available for borrowers with credit scores as low as 650, but you must be in business for at least 2 years, earn at least $1.2 million in annual revenue, and have no bankruptcies or foreclosures in the past three years.
The timing of your business loan plays a major role in your ability to repay the debt without obstructing cash flow. To determine if the timing is right, answer the following questions:
- How is my business’s current financial health?
Thanks to companies like United Capital Source, you can still qualify for several business funding programs amid cash flow problems or slow revenue. But these problems must be temporary and preferably caused by uncontrollable circumstances, like seasonality or unpredictable demand. If your business is struggling to pay its bills and has not proven to have a consistent foundation for revenue, a small business loan might only worsen your situation.
- What is the state of my industry?
Some business lenders (mainly banks) have been known to discriminate against certain industries. Their programs are much more accessible if your industry is thriving and much less if your industry is slowing down or stagnant.
- What does the future look like for my business?
If your business is expected to do well over the next few months, you might want to postpone your business loan. The more revenue you are generating, the higher your borrowing limit will be. Your terms will be more convenient as well. When your business is in a slow period, on the other hand, you probably won’t have access to either reward. Unless, of course, this isn’t your first business loan with this specific business lender, which brings up another factor in your decision.
Many young businesses take out business loans in their early years because they know they will need a lot more money in the not-so-distant future. They might not exactly need the money and will likely only be approved for a smaller amount but the real goal is simply to develop a relationship with the business lender. Once a business lender knows you can pay off debt on time without endangering cash flow, your chances of being approved for another, larger business loan are much greater.
Step 6 (If Necessary)
A big reason companies like United Capital Source are becoming more popular is the availability of accurate, non-biased information. Their representatives will not encourage you to take out a loan if there’s even a slight chance it will be detrimental to your business’s livelihood. So, if you’re still unsure about whether a small business loan is right for you at this time, give one of these companies a call and ask as many questions as you like. The good thing about having so many business lenders to choose from is that you don’t have to settle for one that doesn’t have the time to walk you through the entire decision-making process.